Why Jamie Dimon is wrong about “too big to fail.”

A Huffington Post article today discussed Mr. Dimon’s desire and intention to allow JP Morgan Chase to grow significantly larger than its already dominating (with over $2 trillion in assets) global presence.

Many people seem to misunderstand the phrase “too big to fail.” Even when it first came out, its true meaning was “too big [to allow] to fail.” There is little evidence (outside the general public’s somewhat arbitrary mindset) to suggest that size has a positive correlation with stability. But there is strong evidence to suggest that there is a high positive correlation between size and impact of potential fiscal disaster.

The prudent observer would want to limit the size of a bank to no more than the size of the disaster that the relevant economic system (whether it be a nation, an industry or the global economy) could withstand.

If the fiscal calamities that were Citigroup, Lehman Brothers, Ireland, Iceland (these examples were all cited in the HuffPost article) did not adequately mark the borderline of the “too big to save” territory, what sort of event will mark it?


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